Of recovery, resilience and rope climbing
Will countries be able to manage the unwinding of fiscal and monetary policy as the global economy limps to normalcy post pandemic, and where could it all go wrong? Will we have inflation or deflation? What strategies will the world’s two largest economies employ to achieve sustainable growth? A panel of experts share their perspectives on the prospects for global economic recovery post-Covid-19.
In recent weeks, stock markets have swung from bullish to bearish as concerns over inflation and vaccines cause uncertainty.
But there was very little pessimism on show from economists gracing the screen of the first virtual Credit Suisse Asian Investment Conference. While acknowledging the serious impacts of the pandemic and highlighting the challenges that remain ahead, the overall sense was of a world that was confidently returning to growth.
That was certainly view from experts discussing the world’s two biggest economies. President and CEO of the Federal Reserve Bank of Richmond, Tom Barkin, was keen to emphasize that while the priority was to get the virus under control, with vaccination rates rising and the number of Covid-19 cases falling, the US economy was proving resilient and conditions were primed for a strong recovery.
As evidence for a rebound, Barkin pointed to the US savings rate. While it typically sits at a level of 7%-8%, in January 2021 it was 20% supported by government stimulus checks to individuals and a reduction in spending due to lockdowns and social distancing. Once the economy opens up, people will be keen to spend.
“I do think there’s going to be significant pent-up demand. I am expecting a very robust 2021 and 2022 because I think you’re going to see the people with a high propensity to spend, want to spend,” he said.
All roads lead to growth
Of course, the country that has so far best plotted a Covid-19 recovery is China. It was the only major economy to report growth in 2020, posting a GDP rise of 6.5% in the fourth quarter. And while the government has resisted setting a growth target for 2021, Chong-En Bai, Dean of the School of Economics and Management at Tsinghua University, was more forthcoming.
“We looked at the experiences of other countries that have succeeded in overcoming the middle-income trap. Based on China’s demographic trend and employment participation rate, we estimate potential growth will average 5.6% over the next five years,” he disclosed. Even with the caveat that China faces a less benign economic environment than those comparable countries, he was confident growth in the range of 5%-5.5% was achievable.
“My expectation is that China’s economic growth will soon go back to the pre-pandemic path, as if the pandemic didn’t happen. You have a one-time shock and then after that it recovers and it resumes the earlier growth rate,” said Bai who is also a member of the National Committee of the Chinese People’s Political Consultative Conference and the “14th Five-Year Plan” National Development Planning Expert Committee.
Splits begin to emerge
The bullish stances do not mean that Barkin and Bai are without concerns. Barkin noted the asynchronistic growth emerging between the US and Europe due to the divergence in the Covid-19 infection rate and in the progress of rolling out vaccination programs. Slower growth in a major trading bloc like Europe could impact the economic performance of the US.
Bai is also worried about uneven growth rates, but his focus is on the disparity between emerging markets and developed economies, and what this might mean for the former’s debt position.
“You have a situation where advanced economies are getting back to normal faster than emerging markets. If the monetary policy of advanced economies normalizes sooner than in emerging markets, that may cause some problems for their debt, and if you have huge debt problems in emerging markets, that could be very complicated,” he said.
Is there a cloud on the horizon?
Arguably for investors, the biggest uncertainty is not growth but inflation – namely where is it heading and what is the US Federal Reserve going to do about it? James Sweeney, Credit Suisse’s Chief Economist and Regional Chief Investment Officer for the Americas, summed up investors’ confusion:
“Everybody, including the Fed, is forecasting the US to reach 3.5% unemployment within a year and a half from now, but the Fed’s dot plot suggests they are not going to be hiking until 2024.”
Fortunately, Betsey Stevenson, Professor of Public Policy and Economics at the University of Michigan, was on hand to shed some light on the situation. She explained that after the 2008 recession, while the unemployment rate came down quite quickly, the recovery in prime age labor market participation only began in 2015.
“The Fed is saying ‘you’re forecasting a return [to low unemployment] by 2022 and we see that in the data, but it might not be there in terms of labor force participation and we’re not willing to take our foot off [the gas] until we see that pick up’,” she noted.
However, a key question is how long the Federal Reserve can keep inflation expectations anchored at 2% if they stay above that level for a couple of years, “and that will depend on how good of a job the Fed does in continuing to convince people that they are going to react,” she cautioned.
For the last word on inflation, it makes sense to return to the Fed. If any investors out there are still feeling worried, Barkin drew an analogy from his experience of a rope climbing course to help steady nerves.
“A few years ago, I took part in a ropes course. At the end you had to scale up a telephone poll and then somehow find a way to step on a very small circle and balance yourself as the poll swayed in the wind. The key to that is keeping your eye on the horizon and not look down. You can use that to describe very well the situation we’re going to have with inflation in the next six months.”